How To Recognise If You Have A Bad Business
We live in a time in which entrepreneurs like Jeff Bezos, Elon Musk and others are beloved because of their ability to create great companies. Many of us dream about becoming the next Jeff Bezos. Creating a great company starts with having a truly original idea. Yet, knowing if you have a great idea is often the hard part of entrepreneurship. We become so invested in our ideas that we find it hard to step back and see if we truly have a great or even good idea. In this article, I will discuss how you can recognize if you have a bad business.
I know, this is difficult to swallow. As an entrepreneur, you have to be passionate about your business. There are so many obstacles and typically, it can take years before even a successful business becomes profitable. That’s right, even great businesses have to accept that the first years may be unprofitable. And even great ideas can seem dumb at first. That’s why they’re great, otherwise everyone would have thought of them. Airbnb, Amazon, Bitcoin, and Uber have all had their detractors. You need to be passionate in order to keep going at that time in your business’ lifecycle where passion and your vision are all you have to remind you that you could be onto a winner. Your fellow entrepreneurs understand this and won’t come out and tell you that you have a bad idea. That leaves you in a bad space where your very passion -and its necessity- prevents you from seeing whether or not you have a bad business. So here are some telltale signs to guide you.
- There are Precedents and the Competitive Landscape is Fierce
The purpose of a business is to create shareholder value and it does that by earning returns that are above its cost of capital. The biggest impediment to this is competition. The more competitive the landscape is, the harder it is to earn a return above the cost of capital. For instance, opening an accountancy practice is not likely to create shareholder value. The competition is so fierce that you will have no pricing power, in fact, you will be forced to subsidise your customers by driving fees down, sometimes even below the cost of capital, in the hope that your low fees will attract clients. You may win new clients but you won;t make any profits in doing so.
If you do not have a unique value proposition that rivals cannot easily copy, you won’t have pricing power. Without barriers to entry, you can’t defend any profits you make or even earn any. If you find yourself in a field where the competition is fierce, get out. Unless you have something that will truly differentiate you from your rivals, you can kiss the chance of making a success of your business goodbye. It won’t happen.
- Long Development Cycle
Now, you may have a great idea, but if your development life cycle is long, you face the possibility that a faster-moving competitor will take the lead. For instance, Facebook was able to create a rival to Clubhouse, despite the short time that it had to respond. Tech firms such as Alphabet, Apple, Facebook and others are cash rich and have armies of teams ready to respond to threats. If you are building an app or other tech product, you need to be able to get to minimum viable product soon, otherwise, you will be overtaken.
We’ve seen how Instagram responded to Snapchat with Instagram Reels, and how even LinkedIn copied Snapchat. Of course, TikTok and SPotify have managed to fend off attempts to copy them, though we still do not know if Clubhouse will be able to resist Facebook’s attempts to copy it.
Clubhouse has the advantage that it had scaled to 10 million users before Twitter and Facebook tried to copy it. Yet, even at this stage, Clubhouse needs to be able to innovate quickly, add more features, and grow its user base.
So, if you do not think you can innovate, iterate and develop quickly, in order to get to minimum viable product, and beyond, then maybe you should work on your business’ development team. Speed is everything.
- You’re Bored By Your Own Idea
We spoke about passion in the beginning and how businesses rarely turn a profit right out of the gate. If you do have a great idea, you will need some of that passion to take you through the hardest moments of your business’ life. If your idea does not stir your soul, if it doesn;t get you excited, if it doesn’t threaten to become an obsession, then regardless of how great the idea is, your company will fizzle out. At those difficult moments, you won’t have the emotional resources to power on.
- You’re Following Hype
It’s on the news, everybody’s talking about it, this is the hottest new thing. And you want to dive right in. Well, unless you’re armed with massive resources, you likely won;t be able to take advantage of this hot new trend. And as we said above, competition may be great for consumers, but it’s the enemy of great businesses. So if you’re jumping into a hyped up market, you’re likely one of many entrepreneurs who can smell the scent of massive profits. But because the competition is so fierce, it’s either nobody will earn economic profits, or those who do will be very few. If you don;t have the resources to scale up quickly and conquer the market, you won;t be one of those few who attain minimum viable economies of scale. Instead, you will be among the many whose business ultimately fails. And the trouble with following hype is that often, it fizzles out. You can’t build a business on a transient idea.
As you go through this site and prepare to launch your business, think through these key ideas to see if you truly have a great business idea.